Mr. Jaidev Laxmidas Panchmatia, Vs Mr. Fanendra H Munot & Anr. - Thus for the first time identification committee declared promoters including the Appellant as willful defaulter by order dated 25.05.2021. There was no order in existence prior to 25th May, 2021 declaring the Appellant as willful defaulter.

  NCLAT (25.05.2023) In Mr. Jaidev Laxmidas Panchmatia, Vs Mr. Fanendra H Munot & Anr. [Company Appeal (AT) (Insolvency) No. 840 of 2022] held that;

• Thus for the first time identification committee declared promoters including the Appellant as willful defaulter by order dated 25.05.2021. There was no order in existence prior to 25th May, 2021 declaring the Appellant as willful defaulter.

• The order dated 20.01.2022 having not been challenged has attained finality. The Corporate Debtor is in the Liquidation and Liquidation Process has commenced subsequent to the Order dated 20th January, 2022.

• However, the Appellant if so advised can submit a scheme for compromise or arrangement with creditors as contemplated by Section 230 of the Companies Act, 2013 and Regulation 2B of Insolvency and Bankruptcy Board of India (liquidation process) Regulations, 2016.

• We having permitted the Appellant to submit a compromise or arrangement by this Order, ends of justice will be served if liquidation process be kept on hold for a period of 90 days to enable the compromise or arrangement to be finalized as contemplated by Regulation 2B of the Liquidation Regulations, 2016.

Excerpts of the order; 

# 1. This Appeal has been filed challenging the Order dated 20th January, 2022 passed by National Company Law Tribunal, Court V, Mumbai Bench (hereinafter referred to as “The Adjudicating Authority”) in I.A. No. 691/2021 in C.P.(IB) No. 3942/MB/2019. By I.A. No. 691/2021, the Appellant has challenged rejection of Resolution Plan submitted by the Applicant.

# 2. Brief facts of the case are:-

(i) The Corporate Debtor LB Industries Pvt. Ltd. is a registered MSME. A Company Petition under Section 9 of Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “The Code”) was filed by the Wood Preservers Private Limited-Operational Creditor against the

Corporate Debtor.

(ii) On 13.11.2019, Union Bank of India issued a Show Cause Notice against the Appellant, Corporate Debtor and other directors of the Corporate Debtor asking to show cause within 15 days as to why they may not be declared defaulter as per guidelines of the Reserve Bank of India.

(iii) On 19.11.2019, Company Petition filed by the Operational Creditor was admitted. Show Cause Notice dated 13.11.2019 was replied by the Appellant. After issuance of Form-G, the Appellant submitted a Resolution Plan on 04.08.2020. A Writ Petition No. 2248 of 2020 was filed challenging the show cause notice dated 13.11.2019 which was disposed of by the High Court observing that Union Bank of India to follow the RBI Guidelines.

(iv) The Resolution Plan submitted by the Appellant came to be considered by the Committee of Creditors (CoC in short) in 7th Meeting held on 30.09.2020. It was suggested in the Meeting that Corporate Debtor having classified as fraud and willful defaulter, Appellant is not eligible to submit a Resolution Plan. Resolution Professional was authorized to check the eligibility of the Resolution Applicant and inform the same. Resolution Professional on 08.10.2020 conveyed to the Appellant that Resolution Plan submitted by the Appellant is not being considered since the Union Bank of India has declared the account as fraud. In the 8th CoC meeting dated 09.11.2020 it was noted that Appellant is not eligible under Section 29A of the Code to submit the Resolution Plan. It was resolved that there is no need to send a separate communication for disapproval of the plan to the Appellant. CoC in its Meeting dated 09.11.2020 resolved that there is no requirement of making any application seeking extension of the Corporate Insolvency Resolution Process (CIRP in short).

(v) The Resolution Professional filed an I.A. No. 173 of 2021 seeking direction for liquidation.

(vi) The Union Bank of India issued an Order dated 25.05.2021 declaring Borrower, Promoter and Directors as willful defaulter. An application to review the Order dated 25.05.2021 passed by the Identification Committee was filed by the Appellant. The Review Committee vide its order dated 01.07.2021 refused to review and confirmed the order passed by the Committee declaring the Promoter and Borrower as willful defaulter. Challenging the Order dated 25.05.2021 and the order dated 01.07.2021, writ petition no. 3456 of 2021 was filed by the Directors of the Corporate Debtor before the High Court of Bombay, Nagpur Bench which stayed the above orders of the Identification Committee. 

(vii) An application filed by the Appellant being I.A. No. 691 of 2021 challenging the rejection of the Resolution Plan came to be heard and dismissed by Order dated 20th January, 2022. This Appeal being C.A. (AT) Ins. No. 840 of 2022 has been filed challenging the order dated 20th January, 2022 passed in I.A. No. 691 of 2021.

(viii) The application no. 173 of 2021 filed by the Resolution Professional seeking liquidation of the Corporate Debtor was also heard and allowed by a separate order dated 20th January, 2022. The Adjudicating Authority directed for Liquidation as no Resolution Plan had been approved in the CIRP. Resolution Professional was appointed as Liquidator.

(ix) Against the Order dated 20th January, 2022 passed in I.A. No. 173 of 2021, no Appeal has been filed.

# 3. We have heard Ms. Fatima Barodawalla, Advocate for the Appellant, Mr. Arvind Nayar, Sr. Advocate with Mr. Manish Srivastava, Advocate for Union Bank of India.

# 4. Learned Counsel for the Appellant submits that on the day when Resolution Plan submitted by the Appellant came for consideration before the CoC, there was no declaration by Union Bank of India as willful defaulter it was only notice dated 13.11.2019 issued by Union Bank of India which was immediately objected by the Appellant and ultimately order declaring the promoter and director as willful defaulter was passed on 25.05.2021. The decision of the CoC that Appellant is not eligible under Section 29A is  erroneous decision. Appellant was entitled to submit a Resolution Plan which was not considered on merits. It is further submitted that against the order dated 25.05.2021 declaring promoter and directors as willful defaulter, review application was filed which too was rejected on 01st July, 2021. Both the orders have been challenged by the Directors in Writ Petition before the High Court being Writ Petition No. 3456 of 2021. In which Writ Petition, High Court has already stayed the Order dated 25.05.2021 hence the order passed by the Union Bank of India declaring willful defaulter is not operative as on date.

# 5. Learned Sr. Counsel appearing for the Union Bank of India submits that before issuing show cause notice dated 13.11.2019 to the Appellant, Identification Committee held its meeting on 15.10.2019 where decision was taken that Appellant is willful defaulter. It is submitted that the Corporate Debtor who had availed credit facility from the Union Bank of India has committed default in payment of total outstanding due to the Corporate Debtor on 13.09.2022 is Rs. 110,57,00,000/-. Letter dated 13.11.2019 issued to the Appellant is reporting the fact of willful defaulter. Learned Sr. Counsel further submitted that Corporate Debtor is at present under liquidation and Liquidation Order dated 20th January, 2022 passed in I.A. No. 173 of 2021 has not been challenged by the Appellant. The Liquidation Proceeding is going on hence rejection of the Resolution Plan submitted by the Appellant in CIRP is inconsequential. It is submitted that the Liquidator has in fact issued e-Auction Notice which e-Auction Notice were not proceeded with due to Interim Order passed by this Tribunal on 06.03.2023.

# 6. We have considered the submissions of Learned Counsel for the parties and have perused the record.

# 7. The submission which has been pressed by Learned Counsel for the Appellant is that Appellant was not disqualified under Section 29A of the Code to submit the Resolution Plan and at the time when Plan came for consideration there was no order of identification committee declaring the Appellant as willful defaulter. The question to be answered is as to whether the Appellant was disqualified at the time when the Resolution Plan submitted by the Appellant came for consideration.

# 8. The Resolution Plan was submitted by the Appellant on 04.08.2020. Appellant being promoter of the Corporate Debtor has submitted the plan it being MSME. Resolution Plan was considered in CoC Meeting held on 30.09.2020 and 09.11.2020. The notice issued by the Union Bank of India to the Corporate Debtor, the Directors, Guarantors and the Appellant was dated 13.11.2019. Notice was on the subject reporting as willful defaulters. Show cause notice stated that outstanding sum is Rs. 85,38,51,794.80/- and the account being NPA and the Appellant and CD failed to regularize account in spite of repeated requests. The show cause notice stated following:

• “As per the guidelines of Reserve Bank of India, list of defaulting firm/company along with the names of current directors and names of directors associated with the company at the time the account was classified as defaulter is to be furnished to Credit Information Companies (CICs) for circulation amongst the Banks/Fls. This will make you ineligible to raise further loan from banks and financial institutions in future. Bank also reserve its right to publish your photograph with name as willful defaulter of the bank in daily newspaper for the information of public in general and bank may also disclose the information pursuant to the requirements of any statute/law or court/tribunal order without giving any prior notice to you. In case of non-receipt of any communication to the contrary from your end within 15 days of this letter, we shall declare you as willful defaulter and initiate appropriate steps as advised here in above. Thanking you”

# 9. The above show cause notice clearly indicates that in case of nonreceipt of any communication within 15 days, bank shall declare willful defaulter and initiate appropriate steps. Appellant submitted a Reply to the communication of Identification Committee vide Letter dated 27.11.2019 and ultimately the order was passed by Identification Committee on 25th May, 2021. By order dated 25th May, 2021, the Identification Committee directed as under: 

• “Hence, the committee concluded that the said borrower/its promoters/directors/guarantors be declared as willful defaulters. The Committee directed that the order be served on the borrower/promoters/whole time directors/guarantors allowing them to file appeal against the order of Identification Committee within 15 days to place the same before Review Committee for final view. Ordered accordingly. 

• Sd/-

• M. Ravindra Babu

• (Convener for Identification Committee on willful defaulter)”

# 10. Thus for the first time identification committee declared promoters including the Appellant as willful defaulter by order dated 25.05.2021. There was no order in existence prior to 25th May, 2021 declaring the Appellant as willful defaulter. Appellant applied for review of the order which review was also rejected by Letter dated 01st July, 2021.

# 11. The Appellant has further stated that against the order dated 25th May, 2021 as well as Order dated 01st July, 2021, writ petition no. 3456 of 2021 was filed in which writ petition, High Court of Bombay at Nagpur Bench passed an Interim Order dated 20.09.2021 copy of the order has been brought on record as Exhibit A to the Rejoinder. Order passed by the High Court is as follows:

• “1. Heard.

• 2. The contention is that the impugned orders passed by the Identification Committee for Wilful Defaulter and Review Committee do not record any findings as regards the petitioners being willful, intentional or deliberate defaulters, which is the requirement of the law. The next contention is that pendency of Corporate Insolvency Resolution process and passing of order of moratorium by NCLT Bench, Mumbai have also not been considered while passing the impugned orders. The further contention is that the order to be passed by the Review Committee must be the one which is manned by an officer different from the one who as a member of the First Committee of the Bank had passed the order. Reliance has been placed upon the case of SBI ..vs. Jah Developers (P) Ltd., reported in (2019) 6 SCC 787.

• 3. Issue notice for final disposal at admission stage to the respondents, returnable after four weeks.

• 4. Shri U.M.Aurangabadkar, learned ASGI waives service of notice for the respondent No.4.

• 5. Meanwhile, there shall be interim stay to the effect and operation of the impugned orders, until further orders.”

# 12. The order of the High Court dated 20th September, 2021 is still in operation as submitted by Learned Counsel for both the parties. In view of the order of the High Court, the order of identification committee dated 25th May, 2021 as well as the Review Order dated 1st July, 2021 is not in operation. It is thus clear that in view of the Interim Order passed by the High Court, Appellant cannot be held to be willful defaulter as on date.

# 13. Although we have found that Appellant was not willful defaulter at the time he submitted the Resolution Plan and at the time his plan came for consideration, we cannot lose sight of the fact that by another order dated 20th January, 2022 passed in I.A. No. 173 of 2021 filed by the RP seeking liquidation, Adjudicating Authority has passed an order on 20th January, 2022 which has been brought on record at page 393 of the Appeal paper Book by the Appellant himself. The order dated 20.01.2022 having not been challenged has attained finality. The Corporate Debtor is in the Liquidation and Liquidation Process has commenced subsequent to the Order dated 20th January, 2022. Liquidation Process having commenced there is no occasion for issuing any direction for consideration of the Resolution Plan of the Appellant. However, the Appellant if so advised can submit a scheme for compromise or arrangement with creditors as contemplated by Section 230 of the Companies Act, 2013 and Regulation 2B of Insolvency and Bankruptcy Board of India (liquidation process) Regulations, 2016. It is also relevant to notice that according to the Regulation 2B, compromise or arrangement proposed under Section 230 has to be completed within 90 days of order of liquidation. But we having by this order held that order of identification committee declaring the promoters/directors as willful defaulter is not in operation which we have found by order of the date, ends of justice will be served if 90 days period is allowed to the Appellant to submit a compromise or arrangement to the Liquidator. We having permitted the Appellant to submit a compromise or arrangement by this Order, ends of justice will be served if liquidation process be kept on hold for a period of 90 days to enable the compromise or arrangement to be finalized as contemplated by Regulation 2B of the Liquidation Regulations, 2016.

# 14. In view of the foregoing discussion and conclusion, we dispose of this Appeal in following manner:-

• a. The order of the Adjudicating Authority dated 20th January, 2022 upholding the decision of CoC declaring the Appellant as ineligible to submit a Resolution Plan under Section 29A is set aside. It is held that Appellant was eligible to submit a plan on the date of its submission as well as on the date it came up for consideration.

• b. However, in view of the Corporate Debtor being ordered to be liquidated vide separate Order dated 20th January, 2022 which order has not been challenged, no direction can be issued for consideration of Resolution Plan submitted by the Appellant afresh.

• c. The order of identification committee dated 25th May, 2021 and 1st July 2021 rejecting review not being in operation as on date, we permit the Appellant to submit compromise or arrangement before the Liquidator within 30 days from date of this order which may be considered by the Liquidator for taking appropriate steps in accordance with law. The Liquidator shall endeavor to take a final decision with regard to the compromise or arrangement within 60 days thereafter.

• d. For a period of 90 days, further liquidation proceedings shall be kept on hold by the Liquidator.

• e. After 90 days from this order in event no compromise or arrangement as contemplated by Regulation 2B is approved, the Liquidation Proceeding shall be continued thereafter and completed in accordance with law.

• f. Parties shall bear their own costs.

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Hans Ispat Ltd. Vs. Bank of Baroda. - It emerges from the record that the copy of the order passed by the Identification Committee was never supplied to the petitioners even though written request for the same was made by the petitioners. In view of the above facts and circumstances, the respondent bank while declaring the petitioners as willful defaulter has violated the provisions contained in the Revised Master Circular and has also acted in violation of principles of natural justice.

 High Court Gujarat (07.12.2022) in Hans Ispat Ltd. Vs. Bank of Baroda.  [R/Special Civil Application No. 13933 of 2017]  held that;

• Reasons substitute subjectivity to objectivity right to reason is an indispensable part of sound judicial system. The rational is that the affected party can know why the decision has gone against him. One of the statutory requirement of the natural justice is spelling out reasons for the order made, in other words a speaking order. Even in respect of administrative order the giving of reasons is one of the fundamentals of good administration.

• A number of judgments have held that natural justice is a flexible tool that is used in order that a person or authority arrive at a just result. Such result can be arrived at in many cases without oral hearing but on written representations given by parties, after considering which, a decision is then arrived at.

• Once a show-cause notice is issued and opportunity to reply is afforded, natural justice is satisfied and it is not necessary to give oral hearing in such cases

• Given the above conspectus of case law, we are of the view that there is no right to be represented by a lawyer in the in-house proceedings contained in Para 3 of the Revised Circular dated 1- 7-2015, as it is clear that the events of wilful default as mentioned in Para 2.1.3 would only relate to the individual facts of each case.

• However, we are of the view that Article 19(1)(g) is attracted in the facts of the present case as the moment a person is declared to be a wilful defaulter, the impact on its fundamental right to carry on business is direct and immediate.

• It emerges from the record that the copy of the order passed by the Identification Committee was never supplied to the petitioners even though written request for the same was made by the petitioners. In view of the above facts and circumstances, the respondent bank while declaring the petitioners as willful defaulter has violated the provisions contained in the Revised Master Circular and has also acted in violation of principles of natural justice.

Excerpts of the order;

# 1. Heard learned advocate Mr. Ravi Pahwa for Thakkar and Pahwa Advocates for the petitioner and learned advocate Mr. Bhaskar Sharma with learned advocate Mr. Mihir H. Pathak for respondent no.1.

# 2. Rule returnable forthwith. Learned advocate Mr. Bhaskar Sharma waives service of notice of rule on behalf of respondent no.1.

# 3. By this petition under Article 226 of the Constitution of India, the petitioner has challenged the impugned action of the respondent bank identifying the account of the petitioner as Willful Defaulter and subsequent reporting of the name of the petitioner and its Directors to Reserve Bank of India/CIBIL as Willful Defaulter.

# 4. Brief facts of the case are as under :

4.1) The petitioner is a company registered under the provisions of the Companies Act, 1956 and is engaged in the business of manufacturing of TMT Bars, MS Round Bars, SS Flats and MS Billets.

4.2) In the year 2010, the petitioner company was acquired by Electrotherm (India) Ltd. and therefore, the petitioner is a wholly owned subsidiary of Electrotherm (India) Ltd.

4.3) The petitioner company availed financial assistance from consortium of banks having State Bank of India and Bank of Baroda as members of the said Consortium Banks. The State Bank of India was having debt of outstanding loans of about Rs. 55.00 crores assigned to one Invent Assets Securitisation and Reconstruction Pvt Ltd. in February, 2015. The petitioner company entered into settlement with the said company for repayment of the assigned debt/loans.

4.4) The respondent bank had sanctioned term loan of Rs. 7.50 Crores, Letter of Credit facility of Rs.5.00 Crores and Cash Credit facility of Rs. 20.00 Crores before the acquisition of the petitioner by Electrotherm (India) Ltd. in the year 2010. The Credit facilities were further reviewed by the respondent bank vide sanction letter dated 05.05.2011 and the term loan of Rs. 7.15 Crores, Letter of Credit of Rs. 6.00 Crores and Cash Credit facility of Rs. 15 Crores was sanctioned. Thereafter, the outstanding loan amount was restructured by the respondent bank vide sanction letter dated 30.11.2012. The outstanding loan was further reviewed by the respondent bank vide sanction letter dated 5.01.2015.

4.5) It is the case of the petitioner that due to operational losses, the petitioner company faced severe liquidity crunch and the petitioner company was not able to repay the loans to the respondent bank within the prescribed repayment schedule and accordingly, the account of the petitioner was identified as Non-Performing Asset (NPA) by the respondent bank on 31.07.2014.

4.6) The petitioner company received show cause notice dated 30.09.2016 from the respondent bank wherein it was informed to the petitioner company that the Committee of Executive on Willful Defaulters of the respondent bank is of the opinion that the borrower company and its Directors be classified as Willful Defaulters as per the guidelines of Reserve Bank of India.

4.7) The petitioner made a representation dated 6.10.2016 to the respondent bank pointing out various factors due to which the petitioner company could not make repayment of the outstanding loan within the prescribed time period.

4.8) It is the case of the petitioner that though the petitioner had approached the Board For Industrial and Financial Reconstruction (BIFR) under section 15 of the Sick Industrial Companies (Special Provisions) Act, 1985 the petitioner received the letter dated 5.11.2016 from the respondent bank rejecting the settlement proposal of the petitioner company.

4.9) It is the case of the petitioner that the petitioner received letter dated 16.01.2017 informing the petitioner about personal hearing given to the petitioner on 31.01.2017, however, during the said period, the promoters/directors of the company were out of the country and therefore, the petitioner addressed a letter dated 24.01.2017 to the respondent bank requesting to postpone the hearing before the Committee of Executives on Willful Defaulters.

4.10) It is the case of the petitioner that the petitioner did not receive any intimation regarding the hearing before the Committee of Executives on Willful Defaulters and upon inquiry by the officers of the petitioner from the status of the petitioner company on CIBIL website, the petitioner came to know that the respondent bank has declared the petitioner and its Directors as Willful Defaulters and has so intimated to CIBIL.

4.11) Being aggrieved by the aforesaid action of the respondent bank, the petitioners have preferred the present petition.

# 5. Learned advocate Mr.Ravi Pahwa for the petitioner submitted that the action of the respondent bank is void ab-initio inasmuch as the impugned action is taken by the respondent bank without hearing the petitioner.

# 6. It was submitted that the Committee of Executives on Willful Defaulter did give intimation about scheduling the date of hearing, however, as the promoters/directors of the petitioner company were not available, the petitioner requested to reschedule the date of hearing. However, without giving the opportunity of hearing to the petitioner, the respondent bank took the decision to declare the name of the petitioner as Willful Defaulter and also intimated CIBIL about the same and therefore, the impugned action of the respondent bank is in violation of the principles of natural justice.

# 7. Learned advocate Mr. Pahwa for the petitioner submitted that the Master Circular on Willful Defaulters dated 1.07.2015 issued by the Reserve Bank of India provides for giving an opportunity of being heard to the borrower before any action of declaring such person as Willful Defaulter is taken by the bank and also provides for issuing an order recording the fact of the willful default and the reasons for the same. It was submitted that thereafter the order of the Identification Committee is required to be reviewed by the Review Committee. It was submitted that in the facts of the present case, neither the petitioner has been served with any copy of the order of the Identification Committee nor the order of the Committee is reviewed by the Review Committee. It was therefore, submitted that it was impermissible for the respondent bank to have declared the petitioner as Willful Defaulter in violation of the Master Circular of the Reserve Bank of India.

# 8. Learned advocate Mr. Pahwa further submitted that the impugned action of the respondent is also without jurisdiction inasmuch as the impugned action lacks existence of jurisdictional facts against the petitioner. Referring to the term “Willful Default” as defined in the Circular of Reserve Bank of India, it was submitted that the essential precondition for declaring a person as Willful Defaulter is that the person committing default must have committed the default willfully, deliberately and intentionally. It was submitted that the pre-requisite conditions under which a defaulter can be said to be a Willful Defaulter under the Master Circular of the Reserve Bank of India are not fulfilled in the present case inasmuch as the petitioner has demonstrated through its representations/written submission made to the respondent that the petitioner has not made any willful, intentional or deliberate default.

# 9. Learned advocate Mr. Pahwa further submitted that the impugned action of the respondent bank is likely to cause serious prejudice to the operation and functioning of the petitioner and there are large number of incidental and ancillary units and work force which are dependent upon the operations of the petitioner company. It was therefore, prayed to quash and set aside the impugned action of the respondent bank.

# 10. On the other hand, learned advocate Mr. Bhaskar Sharma with learned advocate Mr. Mihir Pathak for the respondent submitted that the petitioner has made wrong contention before this Court that no opportunity of hearing was given before passing the impugned order. It was submitted that the respondent bank had issued show cause notice to the petitioner company and its directors for declaring them as Willful Directors on 30.09.2016 and the petitioner vide letter dated 6.10.2016 made their submissions and requested for personal hearing before the Committee of Executives on Willful Defaulter. Accordingly, the petitioner company was called for personal hearing on 31.01.2017 however, company requested for postponement of hearing and therefore, with a view to give one more chance for personal hearing to the company, the petitioner was called for personal hearing on 15.02.2017 vide letter dated 1.02.2017, however none of the officers of the petitioner company attended the personal hearing on the said date. Therefore, the Committee of Executives in its meeting held on 15.02.2017 decided to declare the company and its directors as Willful Defaulters. Such decision of the Committee of Executives was unanimously reviewed and confirmed by the Review Committee on 27.02.2017. It was therefore, submitted that the petition may not be entertained.

# 11. Having heard the learned advocates for the respective parties and having gone through the materials on record, in order to appreciate the contentions raised by the respective parties, it would be germane to refer to few Clauses of Master Circular on willful defaulter dated 1st July, 2015 issued by the RBI.

“Clause 2.1.3 : Wilful Default : A ‘willful default’ would be deemed to have occurred if any of the following events is noted:

(a) The unit has defaulted in meeting its payment/repayment obligations to the lender even when it has the capacity to honour the said obligations.

(b) The unit has defaulted in meeting its payment/ repayment obligations to the lender and has not utilised the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes.

(c) The unit has defaulted in meeting its payment/ repayment obligations to the lender and has siphoned off the funds so that the funds have not been utilised for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets.

(d) The unit has defaulted in meeting its payment/ repayment obligations to the lender and has also disposed off or removed the movable fixed assets or immovable property given for the purpose of securing a term loan without the knowledge of the bank/lender.

The identification of the willful default should be made keeping in view the track record of the borrowers and should not be decided on the basis of isolated transactions/ incidents. The default to be categorised as willful must be intentional, deliberate and calculated.”

Clause no. 2.5 : Penal Measures

The following measures should be initiated by the banks and FIs against the willful defaulters identified as per the definition indicated at paragraph 2.1.3 above:

a. No additional facilities should be granted by any bank / FI to the listed willful defaulters. In addition, such companies (including their entrepreneurs / promoters) where banks/ FIs have identified siphoning / diversion of funds, misrepresentation, falsification of accounts and fraudulent transactions should be debarred from institutional finance from the scheduled commercial banks, financial institutions, NBFCs, for floating new ventures for a period of 5 years from the date of removal of their name from the list of willful defaulters as published/disseminated by RBI/CICs.

b. The legal process, wherever warranted, against the borrowers/ guarantors and foreclosure for recovery of dues should be initiated expeditiously. The lenders may initiate criminal proceedings against willful defaulters, wherever necessary.

c. Wherever possible, the banks and FIs should adopt a proactive approach for a change of management of the willfully defaulting borrower unit.

d. A covenant in the loan agreements, with the companies to which the banks/ FIs have given funded/ non-funded credit facility, should be incorporated by the banks/ FIs to the effect that the borrowing company should not induct on its board a person whose name appears in the list of willful defaulters and that in case, such a person is found to be on its board, it would take expeditious and effective steps for removal of the person from its board.

It would be imperative on the banks and FIs to put in place a transparent mechanism for the entire process so that the penal provisions are not misused and the scope of such discretionary powers are kept to the barest minimum.

It should also be ensured that a solitary or isolated instance is not made the basis for imposing the penal action.

Clause no.3 : Mechanism for identification of willful defaulters.

The mechanism referred to in paragraph 2.5 above should generally include the following :

(a) The evidence of willful default on the part of the borrowing company and its promoter/whole-time director at the relevant time should be examined by a Committee headed by an Executive Director or equivalent and consisting of two other senior officers of the rank of GM/DGM.

(b) If the Committee concludes that an event of willful default has occurred, it shall issue a Show Cause Notice to the concerned borrower and the promoter/ whole-time director and call for their submissions and after considering their submissions issue an order recording the fact of willful default and the reasons for the same. An opportunity should be given to the borrower and the promoter/ whole-time director for a personal hearing if the Committee feels such an opportunity is necessary.

(c) The Order of the Committee should be reviewed by another Committee headed by the Chairman/ Chairman & Managing Director or the Managing Director & Chief Executive Officer/ CEOs and consisting, in addition, to two independent directors/ non-executive directors of the bank and the order shall become final only after it is confirmed by the said Review Committee. However, if the Identification Committee does not pass an order declaring a borrower as a willful defaulter, then the Review Committee need not be set up to review such decisions.”

# 12. Thus, clause 2.1.3 defines ‘willful default’ as to who can be said to have committed a willful default as enumerated in Clause (a) to (d). Whereas, Clause-3 provides for mechanism for identification of willful defaulters. Clause 2.5 provides consequences of declaring any lender as willful defaulter resulting into penal measures including criminal case. On perusal of the above provisions of Master Circular, the Identification Committee is required to examine the availability of evidence of willful default on the part of the borrower company and its promoter/whole time director and if such committee concludes that in the event of willful default is occurred, it is obligatory on the part of the Identification Committee to issue a show cause notice to the concerned borrower and promoter whole time director calling for their submissions and after considering their submissions an order recording the fact of willful default has to be passed giving reasons for the same. Therefore, it is incumbent upon the Identification Committee to provide an opportunity of personal hearing to the borrower and promoter, whole time director or the persons, who are to be considered as willful defaulter and the decision of such Identification Committee is to be reviewed by any other Committee, which is Review Committee as per Clause-3(c) of the Master Circular.

# 13. The Division bench of the Bombay High Court in case of M/s. Kanchan Motors and others vs. Bank of India and others reported in 2018 SCC OnLine Bom 1761 has held as under with regard to violation of principles of natural justice as under:

“14. On the close scrutiny of the aforesaid provisions of Master Circular, it is clear that the consequences of declaring any lender as wilful defaulter are serious in nature. It is also clear that for declaring a lender to be wilful defaulter specific finding is required to have been recorded in terms of Clasue 2.1.3(a) to (d) as the case may be. The Master Circular also provides a mechanism to be adopted for identifying the wilful defaulter. It includes, availability of evidence of wilful default on the part of borrowing company and its promoter/whole-time director which needs to be examined by the Identification Committee. If the Committee concludes that an event of wilful default has occurred, it is obligatory on the part of Identification Committee to issue a show cause notice to the concerned borrower and the promoter/whole-time director calling from their submissions and after considering their submissions as may be received, an order recording the fact of wilful default has to be passed after giving reasons for the same. It is also incumbent upon the Identification Committee to give an opportunity of personal hearing to borrower & promoter/ whole-time director if it feels that such opportunity is necessary. The said order of the Committee needs to be reviewed by another Committee (Review Committee) as per Clause 3(c) of the Master Circular.

15. Examining the present matter on the touch stone of the aforesaid provisions, we find that the Respondent Bank has failed to comply with the aforesaid mechanism provided under the Master Circular. It is clear from the record that in response to the notice issued by the Bank informing the Petitioners about their intentions to proceed against them for declaring them as willful defaulter and giving last chance to deposit outstanding amounts, the Petitioners have submitted a detailed reply dated 29th January, 2018 giving reasons as to why such proceeding cannot be initiated. However, it appears that thereafter the Identification Committee has passed an order on 9th March, 2018 recording that the Petitioners have committed wilful default. It is also an admitted fact that the copy of the order dated 9th March, 2018 was not supplied to the Petitioners even though a written request for the same was made. Moreover, in the stand of the Bank in reply to the Petition, it is stated that is not necessary to supply the copy of the order of the Identification Committee to the Petitioners.

16. In the circumstances, in our considered view the Respondents while declaring the Petitioners as wilful defaulter have violated the provisions contained in the Master Circular and have also acted in violation of the principles of natural justice. The impugned action which is penal in nature has been taken causing serious implication on the Petitioners without following the basis principles of natural justice. The impugned order of Review Committee as is clear from a bare reading of it, is a non speaking order as the operative part of the order of Review Committee which contains the reasons reads thus:

• “The Review Committee has examined and reviewed the proceedings initiated order and the findings of the Identification Committee and found that they are in order and confirmed that you have committed the following willful default:

• —

• (Reasons) The unit has defaulted reasons in meeting its payment/repayment obligation to the lender and has not utilized the finance from lender even when it has capacity to honour the said obligations.”

17. This according to our considered view the order of the Review Committee cannot be termed as reasoned order and as such it cannot be sustained.

18. We are also of the considered view that the Respondent Bank cannot be allowed to say that it is not necessary for them to supply copy of the order passed by the Identification Committee. As would be clear from Clause 3(b) of the Master Circular the Identification Committee has to record reasons while passing the order of recording the fact of commission of wilful default as also to assign valid reasons as to whether it is necessary to give the borrower and the the promoter/whole time director the opportunity of personal hearing. This requirement whether has been complied with or not could have been examined only if the said order was brought on record. But strangely in reply the Bank has taken a stand that the order dated 9th March, 2018 passed by the Identification Committee is the internal order and it is not supposed to be served upon the Petitioners. It is also  stated by the Respondents in the reply that no question arises of serving the order dated 9th March, 2018 on the Petitioners and that the order dated 9th March, 2018 is the preliminary internal order and after its finalization by Review Committee, it is conveyed to the Petitioners. Thus from the stand taken by the Respondents, it is clear that they have neither supplied copy of the order passed by the Identification Committee to the Petitioners nor according to them it was necessary. It is also very strange that the said order has not even been brought on record by the Bank to deny the Petitioners’ contention that their grounds raised through reply dated 29th January, 2018 to show cause notice against proposed declaration of wilful defaulter have not been considered and that as to why the Petitioners were denied the opportunity of being heard.

19. In our considered view the stand of the Bank that they are not obliged to furnish copy of the order passed by the Identification Committee cannot be sustained. Such stand if accepted would given rise to arbitrary exercise of powers as the Identification Committee may give complete go bye to the requirement of assigning reasons for declaring a party as Wilful Defaulter and also requirement of giving reasons as to why opportunity of personal hearing would not be necessary.

20. In the present case, as already observed even the order of Review Committee is bereft of any reasons for arriving at the conclusion that, “the Petitioners have defaulted in meeting its payment/repayment obligation to the lender even when it has capacity to honour the said obligation.

21. Having regard to the aforesaid in our considered view failure to supply the reasons by the Identification Committee of recording the fact that the Petitioners are in wilful default and as to why they need not be given an opportunity of hearing when in their reply dated 29th January, 2018 the Petitioners have raised various grounds opposing the proposed action of declaring them willful defaulter and sought opportunity of personal hearing cannot be said to be justified. Similarly absence of reasons in the order of Review Committee also amounts to denial of justice. It is now well settled that reasons are the live links between the minds of the decision taker to the controversy in question and the decision or conclusion arrived at. Reasons substitute subjectivity to objectivity right to reason is an indispensable part of sound judicial system. The rational is that the affected party can know why the decision has gone against him. One of the statutory requirement of the natural justice is spelling out reasons for the order made, in other words a speaking order. Even in respect of administrative order the giving of reasons is one of the fundamentals of good administration.”

# 14. The Apex Court in case of State Bank Of India Vs. Jah Developers Private Limited and Others (Supra) while denying the right to be represented by a lawyer in the in-house proceedings contained in Para 3 of the Revised Circular dated 01.07.2015, has held that Revised Circular, being in public interest, must be construed reasonably as under:

“15. The next question that arises is whether an oral hearing is required under the Revised Circular dated 1-7-2015. We have already seen that the said circular makes a departure from the earlier Master Circular in that an oral hearing may only be given by the First Committee at the first stage if it is so found necessary. Given the scheme of the Revised Circular, it is difficult to state that oral hearing is mandatory. It is even more difficult to state that in all cases oral hearings must be given, or else the principles of natural justice are breached. A number of judgments have held that natural justice is a flexible tool that is used in order that a person or authority arrive at a just result. Such result can be arrived at in many cases without oral hearing but on written representations given by parties, after considering which, a decision is then arrived at. Indeed, in a recent judgment in Gorkha Security Services v. State (NCT of Delhi) [Gorkha Security Services v. State (NCT of Delhi), (2014) 9 SCC 105] this Court has held, in a blacklisting case, that where serious consequences ensue, once a show-cause notice is issued and opportunity to reply is afforded, natural justice is satisfied and it is not necessary to give oral hearing in such cases (see para 20).

16. When it comes to whether the borrower can, given the consequences of being declared a wilful defaulter, be said to have a right to be represented by a lawyer, the judgments of this Court have held that there is no such unconditional right, and that it would all depend on the facts and circumstances of each case, given the governing rules and the fact situation of each case.  . .

 . . . . . . . .

24. Given the above conspectus of case law, we are of the view that there is no right to be represented by a lawyer in the in-house proceedings contained in Para 3 of the Revised Circular dated 1- 7-2015, as it is clear that the events of wilful default as mentioned in Para 2.1.3 would only relate to the individual facts of each case. What has typically to be discovered is whether a unit has defaulted in making its payment obligations even when it has the capacity to honour the said obligations; or that it has borrowed funds which are diverted for other purposes, or siphoned off funds so that the funds have not been utilised for the specific purpose for which the finance was made available. Whether a default is intentional, deliberate, and calculated is again a question of fact which the lender may put to the borrower in a show-cause notice to elicit the borrower’s submissions on the same. However, we are of the view that Article 19(1)(g) is attracted in the facts of the present case as the moment a person is declared to be a wilful defaulter, the impact on its fundamental right to carry on business is direct and immediate. This is for the reason that no additional facilities can be granted by any bank/financial institutions, and entrepreneurs/promoters would be barred from institutional finance for five years. Banks/financial institutions can even change the management of the wilful defaulter, and a promoter/director of a wilful defaulter cannot be made promoter or director of any other borrower company. Equally, under Section 29-A of the Insolvency and Bankruptcy Code, 2016, a wilful defaulter cannot even apply to be a resolution applicant. Given these drastic consequences, it is clear that the Revised Circular, being in public interest, must be construed reasonably. This being so, and given the fact that Para 3 of the Master Circular dated 1-7-2013 permitted the borrower to make a representation within 15 days of the preliminary decision of the First Committee, we are of the view that first and foremost, the Committee comprising of the Executive Director and two other senior officials, being the First Committee, after following Para 3(b) of the Revised Circular dated 1-7-2015, must give its order to the borrower as soon as it is made. The borrower can then represent against such order within a period of 15 days to the Review Committee. Such written representation can be a full representation on facts and law (if any). The Review Committee must then pass a reasoned order on such representation which must then be served on the borrower. Given the fact that the earlier Master Circular dated 1-7-2013 itself considered such steps to be reasonable, we incorporate all these steps into the Revised Circular dated 1- 7-2015. The impugned judgment [SBI v. Jah Developers (P) Ltd., LPA No. 113 of 2015 sub nom Punjab National Bank v. Kingfisher Airlines Ltd., 2015 SCC OnLine Del 14128 : (2016) 154 DRJ 164] [Kingfisher Airlines Ltd. v. Union of India, 2015 SCC OnLine Bom 6075 : (2016) 2 Mah LJ 838] is, therefore, set aside, and the appeals are allowed in terms of our judgment. We thank the learned Amicus Curiae, Shri Parag Tripathi, for his valuable assistance to this Court.”

# 15. In view of the above conspectus of the law and undisputed facts of this case, it is apparent that the respondent bank has failed to comply with the aforesaid mechanism provided under the Revised Master Circular. The notice was issued by the respondent bank to which the petitioners filed detailed reply but the order passed by the Identification Committee recording that the petitioners have committed willful default was never provided to the petitioners. The petitioners came to know about declaring them as willful defaulter only from the website of CIBIL.

# 16. It emerges from the record that the copy of the order passed by the Identification Committee was never supplied to the petitioners even though written request for the same was made by the petitioners. In view of the above facts and circumstances, the respondent bank while declaring the petitioners as willful defaulter has violated the provisions contained in the Revised Master Circular and has also acted in violation of principles of natural justice. As the impugned action which is penal in nature has been taken causing serious implication to the petitioners without following the basis of principles of natural justice, the impugned action of the respondent bank identifying the account of the petitioners as willful default and subsequent reporting of name of the petitioners to the RBI/CIBIL as willful defaulters are liable to be quashed and set aside.

# 17. In view of the foregoing reasons, the petitions succeed and are accordingly allowed. The impugned action of the respondent bank identifying the account of the petitioners as willful defaulters and subsequent reporting of the names of the petitioners to RBI/CIBIL as willful defaulters is hereby quashed and set aside and the matter is remanded back to the Identification Committee of the respondent bank to follow the procedure as prescribed in Master Circular dated 1st July, 2015 by issuing a show cause notice to the petitioners and providing opportunity to the petitioners as per Clause-3 of the said circular. Such exercise by the Identification Committee and thereafter by the Review Committee shall be completed within the period of six months from the date of receipt of this order.

# 18. Rule is made absolute to the aforesaid extent. No order as to costs.

 

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